Growing pains: Tale of a Smiths Falls marijuana startup

Chuck Rifici, then with Tweed Marijuana, sits in the former Hershey's chocolate factory in September 2013. Within a year, he would be gone as CEO. Litigation over his dismissal continues, offering a glimpse of the burgeoning marijuana products industry at ground zero. Adrian Wyld, Canadian Press / Ottawa Citizen

Chuck Rifici and Bruce Linton briefly found common cause when the marijuana industry launched, but relations fractured under the pressure of building Tweed Marijuana at warp speed. Linton and his allies on the board of directors sacked Rifici, who in turn sued for wrongful dismissal. The company countersued. Meanwhile, both entrepreneurs have moved on to commanding heights in what will become Canada’s next big industry.

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From the moment the federal government set out new rules in 2013 to encourage the industrial production of medical marijuana, the race was on.

But there was no reason to think Tweed Marijuana, created by Ottawa entrepreneurs Chuck Rifici and Bruce Linton, would be the one to win it.

On June 6, 2013, the day the new marijuana regime was established, the two had little money to invest, no production facility ready, and their firm had no licence from Health Canada to either grow or transport cannabis products.

Yet, over the next 12 months, Tweed Marijuana secured a massive manufacturing plant in Smiths Falls, engineered a listing of company shares on the TSX Venture exchange, raised $24 million from investors and began selling its first products under federal licence.

Despite this, Rifici — the CEO and co-founder who originally controlled 70 per cent of Tweed Marijuana’s shares — was dismissed in August 2014. A month after that, he was gone from the board as well. No explanation was offered at the time.

Ordinarily, internal corporate disputes such as this excite relatively little interest, especially in such a fast-moving industry. However, Linton and Rifici have emerged as two of the most influential players in a burgeoning, potentially multibillion-dollar-a-year cannabis-products business — and the litigation offers insight into an important phase of its formation.

Linton is chairman and co-CEO of Canopy Growth (formerly known as Tweed Marijuana). Canopy has the largest share of the medical marijuana market, and appears to have secured early front-runner status in the market for recreational marijuana, which becomes legal this month. The company’s shares on Oct. 1 were worth $14.4 billion and Linton’s personal stake was an estimated $180 million.

Rifici, for his part, dusted himself off, and in 2015 joined the boards of directors at Aurora Cannabis, Supreme Pharmaceuticals and CannaRoyalty — cannabis products firms that, as of early October, had a combined market value of $13 billion.

In May 2017 Rifici resigned from all three boards to run the Toronto firm now known as Auxly Cannabis — a platform for investing in cannabis entrepreneurs whose activities range from manufacturing to retailing. Early this month, Auxly claimed a market value of $677 million. Chairman and CEO Rifici’s personal stake was $33 million (including his majority equity ownership of Nesta Holding, an associated company that holds shares in Auxly).

But despite the accumulation of vast personal wealth, on paper at any rate, relations between Linton and Rifici remain chilly. Indeed, they are still in litigation.

When Rifici sued Tweed Marijuana in 2015 for wrongful dismissal, he inadvertently opened a window into the immense pressures of running a startup company in a new industry.

Rifici’s statement of claim, filed seven months after he was fired, was straightforward: He was seeking 12 months’ severance, $230,000, not the four months that he received. He also claimed $100,000 in compensation for “mental distress.”

However, the company’s 2016 counterclaim alleged that Rifici’s performance as CEO had been “unsatisfactory” because he had “consistently missed targets and milestones” in the construction and renovation of the Smiths Falls facilities.

Tweed Marijuana alleged further that Rifici had borrowed $300,000 on his personal account from a Smiths Falls contractor he had hired, creating a potential conflict of interest.

None of these allegations has been tested in court. Linton and Rifici declined to comment about the litigation.

Rifici in his legal reply countered that he had “carried out the duties of his employment in a satisfactory manner, from the commencement of his employment, through to and including August 28, 2014,” his last day as CEO.

This newspaper recently interviewed many of the principals, players and investors about company operations during these early months.

Many of the stresses faced by Rifici and Linton are common to startups. In the main, these can stem from the typically large gap between founders’ dreams and the money available to feed them.

Tweed Marijuana alleged in its 2016 counterclaim that by May 2014, the company “had expended many times the initial estimate prepared by Rifici of $1.8 million in startup costs, was nine months behind on the production of medical marijuana, and was on a trajectory for insolvency.”

Rifici in his reply countered that prior to April 1, 2014, Linton had been responsible for “construction and retrofitting”.

It’s not unusual to see startups underestimate the amount of working capital required, and deadlines also tend to be malleable in young firms, especially when building for an unknown new industry. Disputes over who’s responsible for what arise frequently, given that founders often have multiple responsibilities.

In any case, even though Tweed Marijuana may have been burning through money at a furious pace, the firm proved very successful at raising money, which was one of Linton’s main roles. Indeed, Tweed Marijuana financial reports show that the company tapped investors on at least four separate occasions between Jan. 30 and mid-May, 2014 raising a total of $24 million.

Rifici, for his part, it is suggested in the court filings, appeared to have been running short of cash personally.

Tweed Marijuana alleged in its counterclaim that Rifici “extracted personal favours and benefits from certain of Tweed’s suppliers in breach of his duties” to the firm, which had begun to trade its shares on the TSX Venture exchange on April 4, 2014.

Rifici confirmed in his reply that, starting on April 24, 2014, he borrowed $300,000 from Christopher Saumure, the manager of operations for Guy Saumure & Sons Construction Ltd., the Smiths Falls firm that had a contract to refit part of the former Hershey chocolate factory for marijuana production.

Tweed Marijuana alleged this was a conflict. The reason, it argued, had to do with the ownership structure of Tweed Hershey Drive — the firm that owned the Smiths Falls facility at the time. Christopher Saumure and his father, Guy, owned a piece — as did an entity called the Charles Rifici Trust. Tweed Marijuana alleged in its counterclaim that Rifici had pledged his share of Tweed Hershey Drive to Christopher in order to secure the personal loan. This meant that the arrangement potentially gave the Saumures control of the facility, the company alleged.

Rifici, in his reply, maintained that Christopher and Guy Saumure each held a 12.5 per cent stake in Tweed Hershey Drive — which was confirmed by Christopher in an interview with this newspaper — while the Charles Rifici Trust controlled 21 per cent. Rifici added he was just one of five beneficiaries and one of three trustees with equal voting rights. He argued this was not sufficient to produce a majority stake in favour of the Saumures even if Rifici defaulted on his personal loans.

Rifici, in his legal document, noted he repaid the loans including $57,700 in interest near the end of October 2015. Rifici denied “that he breached any fiduciary duties found to be owing to (Tweed Marijuana)” and that he “never engaged in conduct giving rise to a real or potential conflict of interest.”

When Rifici left Tweed Marijuana in the fall of 2014, he controlled 7.8 million company shares, which were worth nearly $20 million at the then-prevailing price of $2.53 per share.

The litigation suggests that Rifici’s personal financial transactions had little if anything to do with his firing — Tweed Marijuana (which was renamed Canopy Growth in September 2015) acknowledged in its counterclaim that its directors were unaware of the Saumure loan until after Rifici left the firm.

The marijuana products company eventually paid $7 million in cash and shares in January 2017 to acquire Tweed Hershey Drive — and hence, the Smiths Falls manufacturing plant, outright.

The company’s proxy circular reveals Rifici still owned 7.7 million shares in Tweed Marijuana on Aug. 7, 2015, the vast majority through the Charles Rifici Trust, representing 15 per cent of the firm’s equity. But by Aug. 3, 2016, Rifici no longer held more than 10 per cent, which meant he was under no obligation to report his trades.

Given that Rifici repaid Christopher Saumure in October 2015, it suggests he had at least begun to unwind his stake around that time. Indeed, Rifici told colleagues he had begun to sell Canopy shares in earnest shortly after the Liberals won a majority government Oct. 19. A colleague familiar with Rifici’s trading told this newspaper Rifici’s average selling price during the unwinding was in the vicinity of $5 per share.

Rifici himself marked the day he sold the last of this Canopy Growth shares, which trades under the stock symbol WEED. “Happy to announce I am $WEED free,” he tweeted May 2, 2017. “Good riddance old friends,” the tweet concluded. The shares had closed the day before at $9.17.

Rifici came to the public’s attention in November 2016 when the value of shares in Canopy Growth briefly surged above $17 on the TSX, nearly double what they had been. Conservative members of Parliament questioned whether Rifici was benefiting personally somehow from inside knowledge — a Liberal government task force was due to offer recommendations in December about how the new regime for recreational marijuana would be regulated.

Rifici served as national treasurer for the Liberal Party of Canada for a number of years until June 2016, but his party affiliation helped him not at all when he co-launched Tweed Marijuana. At the time, the Conservatives were still in power.

Rifici in February 2017 sued Rona Ambrose, Alexander Nuttall and Blaine Calkins for defamation related to tweets sent in late 2016 during Canopy Growth’s share price surge.

In a statement of defence, Ambrose, Nuttall and Calkins asserted it was their role to hold the government to account for “having allowed Mr. Rifici to hold a high office in the Liberal Party of Canada while he simultaneously stood to benefit financially.”

Rifici in his statement of claim noted that he and the Liberal Party “have at all times maintained, and the fact is, that no conflict of interest exists.” He had quit his role as treasurer five months prior to the spike in share prices in November.

Before they collaborated early in 2013 on a business plan for Tweed Marijuana, Rifici and Linton had each launched or helped to run a series of high-tech firms — Rifici tending toward internet services companies, while Linton specialized in telecommunications software and clean tech.

Christopher Saumure, who dealt with both founders of Tweed Marijuana, offered one of the possible reasons for the unexpected clash between them:

“Bruce is a good guy but he has a strong personality,” Saumure said in an interview. “What Bruce wants, Bruce gets.”

Linton’s main goal, relayed to this newspaper in a previous interview, was to ensure Tweed Marijuana took full advantage of a rare chance to dominate a new industry.

Saumure recalled that after Linton took over from Rifici, the push was on to fill up the Smiths Falls facility.

“It was a tough job,” he said, “We had about 50 people in there but it wasn’t enough to keep up.” Eventually construction giants PCL Construction — a pan-Canadian operation with more than 10,000 trades people at its disposal — and Ottawa-based specialist Morley Hoppner, took over management of the project.

On Sept. 26, 2018, Linton played host to Canopy Growth shareholders in one of the new buildings, the site of a future bottling operation for cannabis-infused drinks. Shareholders overwhelmingly approved a deal in which U.S. beer and alcohol giant Constellation Brands would invest $5 billion. The purpose: to fuel Canopy Growth’s drive to become the globe’s biggest cannabis products firm.

Barely noticed in the documents perused by shareholders was a subtle distinction in the biographical description of Linton. He identified himself as the co-founder of Tweed Marijuana and founder — singular — of Canopy Growth. The vast lion’s share of the growth in the firm occurred while he was at the helm.

As for Rifici, he has transformed his initial Tweed Marijuana stake into seed capital for growing a network of cannabis firms. Even if the value of his Tweed Marijuana shares climbed following his departure, the capital is now his to deploy.

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